Raunak Nath, Tsega Kassaye Derseh: Members Identified With An "X" Above)

Submission Number: Submission 1 M3
Group Number: Group 16
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Raunak Nath India [email protected]
Tsega Kassaye Derseh Ethiopia [email protected]
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Raunak Nath, Tsega Kassaye Derseh
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1
MScFE 610 Econometrics
Group #: _16____ Submission #: __1

9.1 As a Gold ETF portfolio manager, write a TECHNICAL 1-page report about the impact
of the Fed decision on your portfolio
The US Federal Reserve’s decision to reduce the benchmark interest rates by 25 basis points has led to
the price of the Gold ETF to plummet. The price had a sharp decline in November as can be seen from
the graph for the Gold ETF price; the average price in October was 140.87 but this dropped down to
138.57 in November. When looking at the Gold ETF’s price standard deviation for the months of October
and November we can see that it has almost doubled after the interest rate reduction. The standard
deviation of the Gold ETF prices in October was 0.831229 while it was 1.562095 in November. This
indicates the increase in the market volatility after the Fed's decision to reduce interest rates. The higher
market volatility stems from the higher perceived risk in the Gold ETF after the significant dip in Gold ETF
prices following the Fed’s decision. There is an inverse correlation between interest rates and inflation,
so when the Fed reduced the interest rate the inflation rose accordingly. The value of a currency
depreciates when inflation rates rise and as such most other investing options do not produce inflation-
beating returns, thus most people begin to invest in gold which in turn increases the price in Gold ETFs
stemming from the higher demand. Contrary to this, the price of the Gold ETF fell following the interest
rate reduction. This can be attributed to the market belief that the Fed may further reduce the interest
rates in the coming months. This belief in the uncertainty of the market is also evident from the
increased volatility of the Gold ETF in November. Therefore, as the portfolio manager depending on the
desired risk profile, it may be good to maintain my position in the Gold ETF or best to sell if not wanting
something risky.
2

9.2 As an Equity ETF portfolio manager, write a TECHNICAL 1-page report about the
impact of the Fed decision on your portfolio
Although we see a positive trend in the Equity ETF Prices before the rate cut was announced, they were
highly volatile and the demand for Equity as an investment increases post the rate cut. This is expected
as the rate cut is an expansionary fiscal policy and increases the money supply in the economy and the
credit gets cheaper. This enables the businesses to borrow the cheap capital to expand their operations
and therefore the earnings making the equities an attractive asset class. This is backed by the average
prices which rose from 44.27 in October to 45.88 in November. Moreover, the equity ETF returns
become less volatile with the standard deviation in returns decreasing to 0.0048 from 0.0074 also
indicated by drastic reduction in the standard error in the November ARMA model, an indicator of
volatility. As a Equity ETF portfolio manager I will look to increase my holdings in iShares MSCI ACWI
ex U.S. ETF (ACWX) ETF
3

9.3 As a Gold & Equity portfolio manager, write a TECHNICAL 1-page report about the
impact of the Fed decision on the 2-asset portfolio
The US Federal Reserve’s decision to reduce the benchmark interest rates by 25 basis points had an
opposing impact on the two assets. The price of the Gold ETF sharply declined whereas the price of the
Equity ETF slightly rose. The two assets exhibit a negative correlation however the degree of correlation
reduces in the month of November after the Fed’s announcement to cut interest rates. This is clearly
evident as the price of the Gold ETF drastically dove, while the Equity ETF only made a slim gain.
The amount, as well as the split of the two holdings will determine the hedging offered by the two
assets in the portfolio; nevertheless, because the Gold ETF is substantially impacted and the Equity ETF is
less affected, the portfolio's overall book value is likely to decline. After the interest rate cut, the next
step as the portfolio manager should be to reduce the Gold ETF holdings while increasing the Equity ETF
holdings.
9.4 Write a 1-page report that specifically explains how your group divided the work with
details.
4

Before we divided the work, we first discussed what language to use for the project and jointly decided
to use Python as we were both well familiar with it and as it allowed us to easily submit the code and
outputs as an HTML file. We then discussed on the dataset to use for the project, and jointly decided to
use SPDR Gold Shares (GLD) and iShares MSCI ACWI ex U.S. ETF (ACWX) from Yahoo Finance. We also
decided to obtain the 6 active benchmarks of US Treasury yields from the Federal Reserve Economic
Data (FRED) website. We then divided the workload on answering questions 1 – 8. The python code for
questions 1, 2, 3, 4, 6, and 7 was written by Tsega. While the python code for questions 5, and 8 was
written by Raunak. After we discussed as a group on the interpretations of the results, answers to
questions 5.4, 6.5, 7.4, 7.8 and 8.1 were written by Raunak . He also put together the final version of the
code in one Jupyter Notebook after making presentation improvements. Question 9.1 was done by
Tsega while question 9.2 was done by Raunak. We both worked on questions 9.3 and 9.4. Overall, we
divided the work in a fair and equal manner, ensuring that we both had ample opportunity to learn from
the assignment.

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What is the impact of the Fed's decision on a Gold ETF portfolio?

What is the impact of the Fed's decision on an Equity ETF portfolio?

Submission Number: Submission 1 M3

Group Number: Group 16

Tsega Kassaye Derseh Ethiopia [email protected]

Raunak Nath, Tsega Kassaye Derseh

Group #: _16__ Submission #: 1

of the Fed decision on your portfolio

Group #: _16__ Submission #: 1

impact of the Fed decision on your portfolio

ex U.S. ETF (ACWX) ETF

Group #: _16__ Submission #: 1

impact of the Fed decision on the 2-asset portfolio

Group #: _16__ Submission #: 1

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